Advantage Energy Income Fund Offers A Dynamite Dividend

Even if you've been to the Canadian Rockies, you've probably never heard of Advantage Energy Income Fund [USA] (AAV), a Canadian royalty trust that operates in the oil and natural gas businesses in Alberta, British Columbia, and Saskatchewan. In keeping with my recent picks, I'm highlighting AAV because of its incredible dividend.

Unlike many American companies, AAV pays its dividend on a monthly basis, and the yield right now is a whopping 14%. You probably wouldn't be as happy if you bought this a year ago, when it was trading at nearly $20, as the price has nearly halved and is now trading around $11.

I think this is exactly the time to get in. The stock is close to its five-year low, and with energy prices rising again, I think this one has some room for growth. Indeed, AAV's revenues have been increasing steadily, and in June the company merged with Ketch Resources Trust, another energy company with extensive undeveloped fields that provide real potential for growth in the future.

Merging with Ketch will give AAV a chance to increase its margins as it consolidates various operations and achieves greater economies of scale. This will be a good thing, as AAV's operating income dropped significantly this year; while revenues were up more than 25% over 2005, costs were up too and this put a serious dent in AAV's margins. Nonetheless, management has showed itself ready to continue putting money into the pockets of investors.

If you do decide to invest in this one, keep an eye out for news about the tax implications. The Canadian government is considering a highly controversial bill to increase taxes on trusts like AAV; a companion bill is pending in the U.S. Congress, and it could mean you end up paying 20% taxes instead of the normal 15% for dividends. Nothing is final yet, but be sure to factor that possibility into your considerations.

Type of stock: A Canadian energy company with a dynamite dividend.

Price target: If the dividend bill does go through it may sour investors on the stock, and you may see a dip. But outside of that, it's hard to imagine this stock dropping much lower. If you buy around $11 or less, you should see the stock stay about even at worst, while you makea nice 14% dividend on your investment.

Comments

[C. Prunkl:]

Good Luck with the dividend. It's twice as large as the firm's current assets.

2007 May 16 08:09 AM

[Mmarrkk:]

You sure about that? The dividend is $169.7 MM (based on 105+MM shares and a $1.61/shr dividend. I haven't been able to pull up their reserves and current production numbers, but reserves are selling for $2-3/mcf which says their annual dividend is roughly 55-85 BCF per year or 150 - 230 MMCF/day. And remember, since this is a royalty trust, they pass on the majority of the cash flow to the shareholders and their dividends as quoted include a return of capital component. If I get some additional information I'll pass it on tonight.

2007 May 16 08:45 AM

[Mmarrkk:]

Just looked; they produce about 174 MMCFe/day and got $8.65/mcfe Canadian$. They have a reserves life of 11 years and supposedly 4 years of drilling locations inventory. They replaced 104% of their production with new reserves in 2006. They yielded $4.19/mcfe in Cash From Operations in the 1st Quarter (again, CA $). And, their 2006 annual report states that their reserves have a Present Value at 10% of $12.29 per unit/share. I'd say their assets are worth a bunch more than the dividend.

2007 May 16 10:34 AM

[aldenasia:]

What are the tax implication for the dividends if you are a non US or Canada citizen?

Will the Canadian tax authority charge witholding tax on the dividends before it is remitted to the foreign shareholder?

2007 May 17 02:45 AM

[Mmarrkk:]

If held in an IRA or similar, there is a 20% withholding that you cannot get back. If held in a regular taxable account, there is still the Canadian tax but you get a dollar-for-dollar offset on your US Income Taxes in the form of the Foreign Tax Credit. So if you have $200 withheld by the Canucks, you get a credit of $200 on your bill to Uncle Sam. Not a deduction, a credit.

2007 May 17 08:44 AM